It's important to know the unmodified report and the different modified reports for the audit of financial statements. You must also recognize situations that would require a modified opinion.

Consider the following situations. For each independent situation, select the appropriate type of report that should be issued on the client's financial statements. Assume the auditor is independent unless otherwise noted. Also, assume each situation is material unless otherwise noted.

1.		The client has an investment in a company located in a foreign country. The investment is accounted for using the equity method. The auditor is unable to obtain audited financial statements for the investee company and therefore concludes that sufficient appropriate evidence regarding this investment cannot be obtained.		select the appropriate type of report A. Disclaimer B. Either a qualified or adverse C. Either a qualified or disclaimer D. Unmodified
2.		A new accounting standard is in effect for accounting for leases; however, the client decides not to implement the new accounting standard.		select the appropriate type of report A. Disclaimer B. Either a qualified or adverse C. Either a qualified or disclaimer D. Unmodified
3.		One week into the audit of a new client, the accounting firm discovers that one of its partners, who works in the office that is performing the audit, is not independent of the new client.		select the appropriate type of report A. Disclaimer B. Either a qualified or adverse C. Either a qualified or disclaimer D. Unmodified
4.		The client is a manufacturer of commercial and residential lawn mowers that has 15 manufacturing locations across the country. The auditors randomly select three locations to visit and observe the physical inventory. The client's internal auditors, who the auditors have determined are competent and objective, observe the physical inventory at two additional locations. The external auditors only observed 25% of the total inventory, but no internal control exceptions and no material misstatements were noted. The internal auditors also did not find any internal control exceptions or material misstatements.		select the appropriate type of report A. Disclaimer B. Either a qualified or adverse C. Either a qualified or disclaimer D. Unmodified
5.		During the audit of a medium-sized retailer, the auditors noted several internal control deficiencies, of which two were designated as material weaknesses. The auditors performed additional substantive procedures in the areas impacted by the material weaknesses. No material misstatements were noted.		select the appropriate type of report A. Disclaimer B. Either a qualified or adverse C. Either a qualified or disclaimer D. Unmodified
6.		The client will not provide the auditor with the documentation necessary to audit accounts receivable.		select the appropriate type of report A. Disclaimer B. Either a qualified or adverse C. Either a qualified or disclaimer D. Unmodified
7.		The client is involved in a lawsuit with a supplier over a contract dispute. The situation is properly accounted for and disclosed in the financial statements.		select the appropriate type of report A. Disclaimer B. Either a qualified or adverse C. Either a qualified or disclaimer D. Unmodified
8.		The client has estimated and recorded an impairment loss on goodwill, which is its largest intangible asset. The auditors disagree with the management's estimate and feel the impairment loss should be more. Management refuses to adjust the impairment loss to the auditor's recommended amount.